risk off with post-refunding bid for US long end in quieter night (Thursday)

Markets traded small risk off overnight, but the dour sentiment seems to be picking up some steam into the US day. Bearish sentiment from various money managers in the past 24 hours has not helped matters either. As of 8:20 AM ET, Treasuries are .5 bps to 6 bps lower in yield with 30y clearly outperforming, while US equity index futures are sliding further, down roughly 1% an hour before the cash open.

Treasuries have been better bid since the Asian open, with first leg of quarterly refunding out of the way in the US. The new US 30y has led the move overnight, with better Japanese real money interest to buy the issue throughout the Asian session: nothing too aggressive but well bid throughout. Japanese lifer received in USD 30y swaps, and lifted WN again as well. There was the usual Asian bank paying in USD 5y swaps, but shortly before European open Asian central bank bought 7s and 10s with a few less mortgages than normal, and this time some selling some 2s and 3s in the front end.

The European open saw bonds take another leg higher, as buying from Asian real money accounts got a bit more aggressive. Rest of the US curve finally tried to participate, with European real money lifting 10s and buying TY futures. Once Treasuries repriced another 2 bps lower in 30s and 1 bp lower in rest of curve, we basically traded sideways. There was some small deal-related paying in USD 5y and 10y swaps, some macro account in 5s30s flattener, real money doing 2s10s and 2s30s flatteners (unwinds from the other week likely), and more central bank buying of intermediates. As NY walked in, there was dealer buying of 30s, as that sector extends its outperformance.

The Asian session was highlighted by good buying of Aussie 10s after the huge syndication from yesterday was digested (remember that AUD 50BN chased an upsized 19BN of supply, so there should be residual demand); even when the RBA passed on buying anything during normal operation time, Aussie rates barely pulled back. New Zealand announced issuance guidance for the next year and the NZD 60BN caught the market off guard and unhappy, with Kiwi rates backing up sharply after outperforming most of this week. JGB auction in reopened 30s went fine, with decent 3.69 bid/cover, but a larger-than-expected .9 bps tail. Kuroda repeated his normal lines about BoJ having room to cut rates further or increase bond purchases if it needs to get inflation stoked. JGB 10y ended .5 bps lower in yield, Aussie 10s were 5 bps lower, but Kiwi 10s were 6 bps higher. Asian stocks saw losses of between 1% and 2%, largely on the back of the soft US performance yesterday.

European open saw US eminis take a leg lower, seemingly unsettling European bourses on their open. Talk was that Trump continued sabre-rattling over China also weighed on risk. Either way, bunds found a quick bid while peripherals lagged. Lighter Euro issuance has also underpinned, along with lesser corporate supply thus far today. Buying that materialized mid-morning in GGBs and SPGBs has helped peripherals claw back a bit. Irish 10y and 30y were mixed, better interest in the former and lukewarm to the latter, with Ireland now outperforming both bunds and OATs. Bunds have seen Asian real money buying, some deal-related receiving in EUR 20y and 30y swaps, along with a DU/RX (2s10s) flattener by a macro account. Volume has remained fairly light on the continent. Gilts saw good selling in the belly early in the session, along with receiving in GBP 20y sector of the swap curve, all related to 5y and 20y issuance today. The 5y had a large tail but decent bidding while the 20y had lighter bidding but a smaller tail. Net of net, it is done and gilts have managed to find some minor domestic real money support that has them slightly higher in the risk off trade and into this afternoon’s buyback.

Today’s calendar includes weekly claims data along with import/export prices for April. The Fed will conduct its daily purchases at normal time (10:30 AM ET and 11:20) in 20-30y and 4.5-7y, while at 11 AM ET Treasury will confirm next week’s supply as market will watch for them to confirm last week’s guidance of $20BN in the new 20y. Kashkari speaks at 1 PM ET, Bostic talks at 3 PM, and Kaplan will speak at 6 PM ET. Today’s corporate calendar is fairly light thus far, only 8 deals for smaller size after yesterday’s supply tailed to “only” $13.7BN ($62.7BN for the week thus far). The risk off sentiment has definitely curtailed activity in the last day, so we’ll have to see what happens.

Speaking of risk, doesn’t look real pretty here. And sure looks like you are doing a normal (70% of the time) post-refunding distribution, as 30s went bid during the Asian session and haven’t looked back. Yesterday’s data out of Japan that showed buying of foreign bonds (read: mostly US) picked up for the first time in nine week, like since before fiscal year end, highlights the return of the favored buyers of long Treasury product. But I digress, so for choice today in TYM, the predicted range looks like 139-19+ to 139-10 for the remainder of the day after trading 139-15 to 139-05 overnight. But have a signal that says we should try 139-27 so going with that instead and make it 139-27 to 139-10. Support below 139-10 comes in at 139-07, 139-02+, 138-29, 138-22, 138-15+. Resistance comes in at 139-16+, the theoretical objective at 139-19/19+, the favored 139-27, 140-02, 140-18 and 140-24. Remember that 30s are supposed to trade 1.242% in the new 30s (10 bps through the 30y stop out from yesterday) to complete the “distribution” trade so let’s see.

All right, enough for now. Have a great Thursday…